Ladies and gentlemen, welcome to the Williams-Sonoma, Inc. Fourth Quarter and Fiscal Year 2016 Earnings Conference Call. [Operator Instructions] This call is being recorded. .

I would now like to turn the conference over to Beth Potillo-Miller, Senior Vice President, Finance and Corporate Treasurer, to discuss non-GAAP financial measures and forward-looking statements. Please go ahead. .

Thank you, Ashley. Good afternoon. This call should be considered in conjunction with the press releases that we issued earlier today.

Our discussion today will relate to results based on certain non-GAAP measures, including non-GAAP SG&A, operating margin, effective tax rate and diluted EPS, all of which exclude the impacts of the following unusual business events. .

During the first and third quarters of 2016, we incurred reorganization charges related to the reduction of headcount primarily in our corporate function, totaling approximately $13 million or $0.09 per diluted share and $1 million or $0.01 per diluted share, respectively. These charges were recorded as SG&A expense within the unallocated segment. .

During the fourth quarter of 2016, we realized the benefit of approximately $0.08 per diluted share from a onetime favorable tax adjustment, which is recorded in income taxes. .

A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP financial measures and our explanation of why the non-GAAP financial measures may be useful are discussed in our press release..

This call also contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which address the financial condition, results of operations, business initiatives, trends, guidance, growth plans and prospects of the company in 2017 and beyond, and are subject to risk and uncertainties that could cause actual results to differ materially from such forward-looking statements.

Please refer to the company's current press releases and SEC filings, including the most recent 10-K and 10-Q for more information on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this call..

I will now turn the conference call over to Laura Alber, our President and Chief Executive Officer. .

Good afternoon, and thank you all for joining us today. Before we get started, I wanted to talk about the important leadership change that we announced earlier. Sandra Stangl, President of the Pottery Barn brands has decided to resign.

Sandra has been with the company for 23 years, and over that time, she has been incredibly dedicated and provided strong leadership of the Pottery Barn brands. I want to thank Sandra for all of her contributions and wish her the very best. .

Marta Benson, currently Executive Vice President, has become President of the Pottery Barn brands. Marta joined Williams-Sonoma in 2011 and successfully led the acquisition and growth strategies for both Rejuvenation and Mark and Graham. Prior to joining Williams-Sonoma, Inc., Marta has served as CEO of Gumps. .

Jennifer Keller, Executive -- currently Executive Vice President, has become President of the Pottery Barn Kids and Pottery Barn Teens brands. Jennifer has been with the Pottery Barn brands for 20 years and has proven her ability to grow business and build strong teams..

Jeff Howie, currently Executive Vice President of Pottery Barn brands, Inventory Management and Brand Finance, has become Executive Vice President, Chief Administrative Officer of the Pottery Barn brands. Jeff has been with the company for 15 years, serving across several brands, most recently at Williams-Sonoma.

Jeff will be instrumental in helping us drive operational excellence and deliver great customer service. .

Please join me in thanking Sandra and congratulating our executives on their expanded roles..

Now I'd like to discuss our 2016 results and plans for 2017. On the call with me are Julie Whalen, our Chief Financial Officer; and John Strain, our Chief Digital and Technology Officer. .

In 2016, with net revenues at over $5 billion, we generated revenue growth of 2.2%, including another year of double-digit growth across West Elm; our newer businesses, Rejuvenation and Mark and Graham; and our company-owned global operations.

We also delivered record earnings per share of $3.43, which is at the higher end of our guidance and reflects the strong operational performance we drove across the supply chain all year. .

reasserting our product leadership with innovative products at the best value; revolutionizing our inventory through supply chain and inventory improvements; transforming our marketing with strategies and leadership that increase new customer acquisition; and changing our approach to real estate by enhancing the retail experience.

During the year, we successfully executed against all these long-term strategies. .

First, in product leadership, our multi-brand, multi-esthetic strategy allows our customers to create a home that is a reflection of their personal style with a wide range of choices presented in an organized and intuitive way, and our direct sourcing advantage with over 1,000 associates around the world overseeing the manufacturing of our products allows us to ensure a consistently high level of quality at a great value..

In 2016, our product initiatives were focused on offering more differentiated products with a superior price/quality relationship, design esthetic and functionality. In Pottery Barn, the results of the extensive brand diagnostic work we conducted in 2016 provided the foundation of the brand repositioning and a clear road map forward.

We have begun to execute on this plan, and we are already beginning to see positive consumer response to our new offerings, including sales increases in such categories as decorating and in value price points, these areas which -- that are key to long-term growth as they drive new customer acquisition. .

In PB Kids, we launched our Healthy Home strategy with expanded GREENGUARD-certified furniture and organic bedding options, and we were the first children's home furnishings company to launch Fair Trade products.

In our Fair Trade category, customers are responding to our high quality and new elevated finishes, which are key points of differentiation to the market. .

In our Gear business, we innovated print, pattern and personalization, offering a broader assortment spanning the ages of childhood. .

In PBteen, we had success at our expanded dorm offering, driven by quality textiles and easy decorating and storage solutions. In furniture, our customers are responding to our new more complex furniture finishes and furniture with great teen functions, such as storage lofts and platform beds.

And collaborations will continue to be an important strategy to offer differentiated products and broaden the reach of the brands. .

In Williams-Sonoma, we continued the expansion of our Williams-Sonoma-branded products. Introductions included our exclusive ceramic cookware, professional copper cookware, high-quality glassware and electrics. .

In our Open Kitchen line, which appeals to a broader demographic, we've also increased our offerings with affordable electrics and bake ware, and we increased the number of new exclusive products from our strategic vendor partners throughout the year. .

In West Elm, we continued to expand and evolve in our furniture business, introducing a new vision of modern design and increasing our outdoor offerings. We've also successfully introduced partnerships with Casper and Sonos, both of which enhance our position as an experiential retailer. .

In our approach to supply chain and inventory improvement, we've been focused on service as a key differentiator in our strategy, and the investments we've made all year long in supply chain paid off in the fourth quarter.

Our DC teams' processed reengineering drove significant productivity in customer service improvements, resulting in faster order fulfillment and a sizable year-over-year decrease in service calls and escalations.

We continue to make progress in our home delivery services, as better positioning of inventory and a focus on multi-unit shipments resulted in an improved customer experience and a measurable improvement in pieces for delivery.

Our new Southeast distribution center in Georgia is now running at capacity, shipping approximately 80% of our Southeastern volume. Average delivery times to customers in this region have improved by 3 to 5 days, and we have realized freight savings. Our focus on inventory and SKU reductions also drove efficiencies throughout the supply chain..

In our marketing, we are focused on driving an improved customer experience and further e-commerce growth. As you know, we've always had a high percentage of e-commerce sales due to our catalog heritage. This year, we reached almost 52%, and the e-commerce channel continued to be the highest growth area for us. .

Our digital marketing investments in 2016 included a focus on improving the online shopping experience, particularly in mobile, and increasing online advertising spend across all of our brands.

We understand the increasing role that mobile plays in consumer shopping behavior, and our investments focused on creating a more friction-free experience have resulted in stronger conversion metrics..

On the advertising front, we have increased top-of-funnel programs designed to reach new audience and drive brand awareness. With a rich history of inspiring imagery and editorial in catalogs, we are capitalizing on the enhancements across the industry and digital storytelling.

We are reaching our customers in new ways, including video, how-to articles and with other inspiring content vehicles. While we increased our top-of-funnel efforts, we still believe one of our key competitive advantages is our help file.

We continue to find ways to identify and target custom audiences that are most responsive to the various campaigns our brands send. These efforts allow us to better deliver more relevant messaging across all of our communication channels, including e-mail, mobile, social platforms, direct mail and on our site..

Also, as we mentioned on our last call during the fourth quarter, we issued our first cross-brand loyalty program, The Key, leveraging our competitive advantage to a strong diverse brand portfolio. The Key is designed to showcase our brands and reward our customers for shopping.

The Key initiative is driving new-to-brand customer acquisition at a very effective cost profile. In Q4 alone, we saw that customers who joined The Key shop more of our brands and shop more often with a higher average spend.

Over the next 24 months, we will continue to expand upon The Key program with improved technology and differentiated experiences and services..

The other area of focus is our approach to retail. Throughout 2016, we've been taking aggressive approach in our retail and real estate strategies to improve the experience in our stores. We have selectively invested in remodels and refreshes to make our stores more of a destination.

We've identified stores that we may close upon natural lease expiration or potentially reposition to a more desirable location..

In Pottery Barn, in 2016, our new store model was tested and proven in multiple locations, and we plan to selectively remodel stores in other key locations. .

In Williams-Sonoma, we opened, relocated or remodeled 11 stores in 2016, and our newly designed stores has outperformed the fleet and are meeting our high benchmark for profitability. We've also improved store performance by adding Williams-Sonoma Home to select locations, and we ended the year with 36 installations.

Home has demonstrated a positive impact on e-commerce growth in those markets. .

And in West Elm, during 2016, we successfully opened 13 new locations around the country. In each location, our local shopkeepers are empowered to tailor their assortments to their customers' preferences and to build relationships with bulk [ph] homemakers and designers to present a highly localized retail experience of unique products..

Now I'd like to discuss the key fourth quarter highlights within our brand portfolio, beginning with the Pottery Barn brands. Across the Pottery Barn brands, comparable brand revenue has declined 4.6%, including Pottery Barn at a negative 4.1%, Pottery Barn Kids at a negative 4.9% and Pottery Barn Teen at a negative 8.1%. .

In Pottery Barn, although we are not satisfied with the comps, we did see a sequential improvement from the prior quarter in several key categories. There was a good response to our holiday decorating and gifting strategies with high sell-throughs on our grab-and-go gift assortment. .

In Pottery Barn Kids, customers responded positively to our new product introductions in nursery, playroom furniture and upholstery. Strong performance in these categories, however, was offset by softness in textiles and decorative accessories in Pottery Barn Kids. .

Pottery Barn Teen had a difficult quarter. Although we had some runaway hits on occasional seating, collaborations and seasonal textiles, we did not have enough inventory in these items to meet customer demand, and therefore, were not able to offset the softness that we experienced in the other categories..

When business began to soften earlier last year, we knew we had to approach growth differently, and we initiated an intensive brand diagnostic that included extensive customer feedback on our value equations.

This work highlighted clear opportunities for the brands, and we have developed a quarter-by-quarter road map of initiatives to implement across all areas of the business. Because we began some of this work in early 2016, we are already able to assess initial results and appropriately build upon them.

We're seeing some positive trends, particularly in decorative accessories, and we are chasing some strong furniture introduction. .

Our spring marketing reflects our brand work to bring inspiration home with more casual assortments, lifestyle photography and storytelling. We're also investing in digital advertising to drive new customer acquisition and brand reconsideration.

We believe a focus on improving our value equation across all categories, making decorating and entertaining easy and offering a diversity of looks to attract new customers will drive growth..

Now I'd like to discuss Williams-Sonoma. In the fourth quarter, Williams-Sonoma continued to build momentum, with comparable brand revenues of 1.4%, primarily driven by the food and gifting categories as well as double-digit growth in Williams-Sonoma Home.

This year, we focused on delivering high-quality products, acquiring new customers and transforming our retail and customer experience. And we believe the brand's performance throughout 2016 demonstrates that our strategies are working and sets up the foundation for future growth..

Now I'd like to discuss West Elm. In the fourth quarter, West Elm delivered revenue growth of almost 11% and comp growth of 6.5%. For the year, West Elm had total revenue growth of 18.3% and comp growth of 12.8%, including -- and including the revenue from our franchise partners, West Elm reached the $1 billion milestone in 2016.

We also successfully launched West Elm Workspace and are under way with our West Elm HOTEL launch. We continue to be very optimistic about the growth prospects of this brand and are very aggressive in our expansion plan. .

Now I'd like to discuss our newer brands, Rejuvenation and Mark and Graham, which, combined, grew 25% in the fourth quarter and demonstrate our ability to successfully grow new businesses internally. Our Rejuvenation brand delivered another strong quarter with double-digit comp growth in both our e-commerce and retail channels.

We continued to drive increased spend at our existing customers and accelerated the acquisition of new customers with expansion into new esthetics and product categories like chandeliers, furniture and functional accessories as well as the focus on domestic manufacturing, including the support of emerging American designers..

We opened our Chicago store in November, driving results well above our plan, and we'll be opening our next store in New York later this month. And store performance continues to exceed expectations. We look forward to sharing the results of our continued growth strategy with you. .

Now I'd like to talk about Mark and Graham. Mark and Graham's double-digit growth in the fourth quarter was driven by their offering of customizable gifts and a premium gifting experience. We particularly saw success in innovative tech gifts, small leather goods and key item accessories, especially in items under $50.

Mark and Graham will continue to focus on classic, unique, innovative and affordable gifts as well as being the definitive source for quality online gift giving. .

And finally, our global business. This business continues to exceed our expectations, and the fourth quarter was no exception. Our focus on improved operations and sustainable profitability continue to drive momentum in our company-owned businesses.

Our relationship with our partner in England, John Lewis, also continues to gain momentum with the opening of 8 additional shop-in-shop locations during 2016. Additionally, during the fourth quarter, 10 new global franchise locations were opened.

Liverpool opened 7 new stores throughout Mexico, while Alshaya opened our first 2 stores in Qatar and an additional store in Saudi Arabia. We ended the year with 75 franchise and wholesale points of sale. And we recently announced a very exciting new partnership to bring our brands to the dynamic retail market of South Korea.

We have partnered with Hyundai Livart Furniture, an affiliate of the Hyundai Department Store Group, to open 30-plus stores over the next 5 years, along with e-commerce. And we are actively pursuing other franchise opportunities around the world..

As we look to 2017, we will continue to improve performance with a focus on our high strategic priorities of innovation and operational excellence. We'll continue to strengthen our competitive advantages through innovation in e-commerce, our products and our services as well as the retail experience. We are focused on continuous e-commerce innovation.

We were early to understand the importance of e-commerce and we now generate almost 52% of our revenues online, and we do so profitably. We know how and why our customers shop in every channel across our brands, and we'll continue to aggressively invest to expand our digital leadership. .

In 2017, we will continue to invest heavily in digital technology. In a fragmented and evolving retail environment where customers are targeted by multiple retailers, we are investing in powerful ways to increase brand-level awareness and convert awareness to purchase.

We'll be implementing digital tools such as next-generation product information pages, 3D product visualization and increased site personalization to deepen online engagement of both new and loyal shoppers and to further expand loyalty across our strong and diverse portfolio of brands..

Based on our 2016 successes, we are investing more than ever in advertising, specifically our e-commerce spend. Online advertising initiatives will target top-of-the-funnel vehicles that drive brand awareness and new customers, increased spend for purchase and higher participation in life-stage programs like registry and new movers.

We will advertise aggressively to meet strategic goals like increasing unaided brand awareness. We're also building on our digital campaigns across various social media platforms to inspire our existing customers.

And importantly, we are increasing advertising investments in cross-brand initiatives like The Key loyalty program to increase shoppers' engagement frequency and to drive awareness of our emerging brands and services. We are also focused on delivering further product and service innovation.

Some competitors are attempting to attract customers with low-quality products at low prices. We know that our customers come to us for inspiration, service and high-quality products at competitive prices..

In Pottery Barn Kids and Teens, we are driving innovation and product offerings across all stages, from baby to toddler, tween, teen and dorm. We are focusing on opening price point products by increasing our Gear business and providing opportunities for easy decorating refreshes.

And in Williams-Sonoma, we will continue to introduce high-quality products under the Williams-Sonoma brand and to develop innovative exclusives with our third-party vendors..

This spring, we'll launch a Williams-Sonoma Home collaboration with Aerin Lauder, featuring home furniture, lighting, decorative accessories and tabletops. We're also refining our product offering to meet evolving consumer lifestyle through esthetic variation and high-quality products that meet their specific needs.

For example, Pottery Barn launched its small spaces collection in February, which is already showing positive results. The collection is focused on opening price points and smaller-scale solutions, primarily upholstery, furniture and functional accessories.

Also, in January, West Elm successfully introduced its new vision of modern design that has been received well by both customers and the design community..

We are also addressing our customers' changing shopping needs and preferences with innovation of the retail experience. The role of retail stores continues to evolve. As an established multichannel retailer, we offer shoppers integrated experience across channels, all of which positively contribute to their perception of our brands and products.

Our retail stores are our single best source of new customer acquisition and are a meaningful advantage over digital pure-play competition. To enhance the customer experience in all of our stores, we're investing in point-of-sale technology and scheduling tools which will provide operational efficiencies and elevated service levels..

Given the declining mall traffic and shifting consumer behavior, we continue to evaluate the role our retail stores can and should play.

We believe that our retail stores must be a source of inspiration and value-added services that translate not just to in-store sales but also to establishing brand loyalty and increasing multichannel purchase behaviors.

For example, Pottery Barn store remodels in key markets like South Coast Plaza and Corte Madera not only improved in-store sales but also increased online sales in nearby ZIP Codes. As we said earlier, adding Williams-Sonoma Home at select Williams-Sonoma stores has also resulted in both in-store and online sales increases.

These examples demonstrate how retail stores can contribute to both enhanced customer experience and top line revenue growth..

Recognizing the role of retail stores in our overall brand experiences, we will add new stores where appropriate. In West Elm, we continue to see great opportunities in localized and experiential retail and have plans to open 10 new stores this year..

In Williams-Sonoma, we will open 2 new stores in the first quarter located in outdoor lifestyle centers that include grocery stores, restaurants and exercise facilities. We will continue to invest in optimizing top-performing stores with refreshes and added services while closing underperforming stores.

We will continue market-by-market analysis by brand in order to best position our retail fleet for the future. As stores continue to come up for lease expiration, we'll have the opportunity to close or reposition those that don't meet our standard. .

Beyond these retail improvements, we are pursuing alternative channels for customers to experience our brand in rich and inspiring context.

For example, our initiatives and hospitality with Marriott and the development of West Elm HOTELS as well as West Elm Workspace will give customers entirely new ways to experience the brand as they travel and work. We're exploring similar ideas across all of our brands..

In 2017, we'll also continue to focus on operational excellence, driving strategies that directly improve our customers' experiences and value perceptions.

Our relentless focus on optimizing our supply chain will continue, and results in 2016 prove that these customer-based initiatives translate to both improved customer satisfaction and operational efficiencies. We intend to be the market leader in customer satisfaction, and we will measure it at every possible interaction.

We have strategies and teams focusing on key customer touch points, including order visibility, backorder management, furniture home delivery and quality and damages. .

Inventory optimization will also continue to be a key initiative for us. In 2016, we began the implementation of a robust inventory planning tool focused on demand forecasting and replenishment. In Q2 and Q3 of this year, we'll continue the rollout of the replenishment module.

We believe this solution will improve in-stock levels and customer satisfaction by reducing local market out-of-stocks. .

The underlying foundation of all these initiatives is our company's culture and values. We believe our values differentiate us and that our customers care about how their products are made, the working conditions under which they are made and the safety of the materials that are used.

Our customers care about the environment and materials they bring into their homes and share with their families. And across all of our brands, we are committed to honoring these shared values.

With initiatives like Healthy Home in the Pottery Barn brands, we offer a range of products that are good for families and the environment and are expanding our offerings of GREENGUARD-certified furniture, organic bedding and Fair Trade goods. .

In West Elm, we have targeted 20% of our assortment to be Fair Trade Certified by the end of 2017 with the goal of 40% by 2019.

And in Williams-Sonoma, we offer the best-quality foods made with the purest ingredients possible, whether sourced from around the world or developed in our own test kitchen, and we continue to celebrate local food artisans in our communities. .

Supporting these efforts is our direct sourcing infrastructure with our own associates directly overseeing the manufacturing of our products. This means we can monitor both social compliance from fair wages to working conditions as well as the quality and safety of materials used in the construction of our products. .

It is important to be a positive influence in the communities where we operate. We invest in the people and our supply chain who make our products, increasing economic opportunities for workers through programs, enhanced benefits and education such as the HERproject and the Nest Artisan Advancement Project.

And closer to home, we and our brands partner with organizations such as St. Jude Children's Research Hospital, No Kid Hungry, the Whole Planet Foundation, Canada's Children's Hospitals and AIDS Walk in San Francisco and New York..

Since 2012, we've helped to raise over $17 million for these kinds of organizations, and we have donated merchandise and given grants totaling over $20 million to organizations that align with our areas of focus. Doing business the right way is who we are. It's important to us and important to our customers.

We are deeply committed to offering innovative, high-quality products that enhance the lives of our customers and enrich our communities. .

Looking ahead, we have specific plans in place to drive innovation across our brands, creating differentiated experiences and using digital technology in new ways for deeper engagement with consumers.

We will continue to drive operational excellence across the organization, and we will increase shareholder value by keeping the customer at the center of everything we do. We have the infrastructure, strategies and talent in place, and we are confident in the long-term prospects for our company. .

I will now pass the call over to Julie to discuss our financial results and guidance. .

Thank you, Laura. Good afternoon, everyone. Before I walk you through the fourth quarter financial results in more detail, I would like to begin with a few fiscal year 2016 financial and operational highlights. Fiscal year 2016 was another year of solid accomplishments. .

For the full year, we delivered net revenue growth of 2.2%, taking our total revenues to over $5 billion, and our earnings per share grew to $3.43. Our e-commerce revenues grew to almost 52% of total revenues.

West Elm delivered another year of outstanding growth, with revenue increasing more than $150 million or 18.3% and comparable brand revenue growth increasing 12.8%, a double-digit increase for the seventh consecutive year. Our emerging brands, Rejuvenation and Mark and Graham, together grew 27%.

And in our company-owned international operations, we saw another year of double-digit growth at 32.5%. .

Our gross margins at 37% were relatively flat to last year. Occupancy deleverage of approximately 40 basis points was offset by improved selling margins primarily resulting from the progress we have made in our supply chain initiatives as well as the direct sourcing advantage we have over other retailers. .

Operating income was down only 20 basis points to 9.6% due to SG&A deleverage from our decision to invest in digital advertising to drive new customer acquisition. .

On the balance sheet, merchandise inventories were flat year-over-year, demonstrating our commitment to hold inventory growth below sales growth.

And we generated $525 million in operating cash flow, allowing us to invest in the business in our long-term initiatives, with almost $200 million in capital expenditures and returned $285 million to stockholders in the form of share buybacks and dividends. .

Now I would like to discuss our fourth quarter financial results. In the fourth quarter, net revenues were relatively flat to last year at $1,582,000,000, with comparable brand revenues decreasing 0.9%.

Revenue growth was driven by West Elm; our newer businesses, Rejuvenation and Mark and Graham; Williams-Sonoma; and our company-owned international operations. This revenue growth was offset by the top line softness we saw across the Pottery Barn brands..

Gross margin for the fourth quarter at 39.3% expanded 100 basis points over last year, including occupancy cost deleverage of 30 basis points in the fourth quarter. Occupancy costs were $169 million in the fourth quarter of 2016 versus $165 million in the fourth quarter of 2015. Merchandise margins were 20 basis points higher than last year.

The remaining gross margin leverage primarily related to our supply chain and inventory initiatives. .

SG&A increased to 25.7% of net revenues from 24.3% in the fourth quarter of 2015. This 140 basis point deleverage was primarily associated with higher employment expenses due to the timing of incentive compensation costs, including the impact from recording incremental stock compensation expense in order to reflect lower-than-expected forfeitures.

Additionally, we got higher digital advertising expenses from our decision to invest in new customer acquisition. .

Operating margin for the fourth quarter was 13.6% versus 14% in the fourth quarter of 2015. By channel, the operating margin in the e-commerce channel in the fourth quarter was 23.7% versus 22% last year.

The 170 basis point improvement was primarily related to higher selling margins, reflecting the ongoing benefits we are seeing from our supply chain and sourcing initiatives, partially offset by the investment in digital advertising expenses. .

In the retail channel, the operating margin was 15.7% versus 15.3% in 2015. Leverage in the retail channel resulted primarily from higher selling margins. Corporate unallocated operating expenses represented 6.2% of net revenues versus 4.6% of net revenues in 2015.

The 160 basis points of deleverage was primarily due to the higher employment costs resulting from the timing of incentive compensation expense as well as incremental occupancy costs due to various technology investments in the business. .

The effective income tax rate in the fourth quarter, excluding the onetime favorable tax adjustment, was relatively flat to last year at 36.5% versus 36.6% last year. These overall results generated $216 million in operating income and $1.55 in diluted earnings per share in the fourth quarter. .

On the balance sheet, we ended the quarter with a cash balance of $214 million and no debt, and merchandise inventories were essentially flat at $978 million. Merchandise inventories across the Pottery Barn brands, however, were down almost 3%. .

Though we were disappointed in our fourth quarter top line performance in the Pottery Barn brands, Williams-Sonoma, West Elm, and the continued success of our other growth initiatives, combined with our strong operational execution allowed us to drive significant gross margin expansion and to meet the high end of our earnings guidance. .

Now I'd like to discuss our 2017 guidance. For the first quarter of 2017, we expect revenue growth and comparable brand revenue growth in the range of negative 1% to 2%, with net revenues in the range of $1,085,000,000 to $1,120,000,000.

We expect operating margin to be below last year's operating margin rate, and we expect diluted earnings per share to be in the range of $0.45 to $0.50..

For the year, we expect to grow net revenues 2% to 4% to a range of $5,165,000,000 to $5,265,000,000, with comparable brand revenue growth in the range of 1% to 3%. We expect operating margin to be 9.4% to 9.6%. Diluted earnings per share are expected to be in the range of $3.45 to $3.65. .

This guidance reflects the investments we are making across our business to strengthen our competitive advantages and position us for long-term market share gain, including a significant investment in e-commerce to support continued profitable growth with further investments in digital advertising, to drive new customer acquisition as well as capture and convert awareness into purchase.

And specific to the first quarter, we are also incurring incremental year-over-year costs associated with our new Southeast distribution center that was not fully up and running until the second quarter of 2016.

We believe these investments will improve the customer experience and top line performance as well as drive further operational efficiencies. .

As far as our capital allocation strategy, we remain committed to a balanced capital allocation strategy, utilizing our operating cash flow to first invest in the business, to support our ongoing growth initiatives with capital expenditures expected to remain within the range of $200 million to $220 million and to return cash to shareholders.

Our capital investments for fiscal year 2017 are focused on those areas that support our strategic priorities of innovation and operational excellence that Laura spoke to earlier and where we see sustainable long-term returns for our shareholders.

These investments are centered on fueling top line growth, improving the customer experience and driving operational efficiencies, all of which will strengthen our competitive positioning..

We are investing in e-commerce and digital leadership and supply chain and inventory management in our retail transformation and in West Elm. We also expect to return cash to shareholders in the form of share repurchases and dividend payments. We expect to repurchase shares annually at a level to at least offset equity dilution.

We have approximately $411 million remaining on our multiyear, $500 million share repurchase program that we entered into last year. We also expect to continue to target our dividend levels at approximately 35% to 40% of net income and in line with the S&P 500 dividend yield. .

Today, we announced a 5% increase in our quarterly dividend to $0.39. This is the 11th dividend increase we have had since we first started paying dividend in 2006. This will have us returning almost $1.6 billion to our shareholders between both dividend payments and share repurchases over the past 5 years. .

As far as our 3-year outlook, given the evolving retail landscape and the investments we are making today to support our future long-term growth, our guidance in the shorter term will not match our 3-year outlook previously provided to you last year of mid- to high single-digit revenue growth and low double-digit to mid-teens earnings growth.

Longer term, however, we are confident that we can return to these higher growth rates. .

Our competitive advantages, well-known brands, a multichannel business, superior customer service, a continued focus on operational improvement, an experienced leadership team, a solid balance sheet and a culture of strong financial discipline combined with our opportunities for growth give us the confidence that we will be able to drive sustainable, long-term profitable growth..

I would now like to open up the call for questions. .

[Operator Instructions] And we'll take our first question from Jessica Mace with Nomura. .

My question is about the supply chain efficiency that seems like a very significant part of the gross margin expansion in the fourth quarter.

I was just wondering if you could give us a sense of how much of the benefit from those supply chain initiatives is still remaining?.

Yes. So we are really confident in our ability to continue to generate supply chain efficiencies. It's, quite honestly, one of the things inside our company that we're most passionate about. We have a team that is dedicated to this, and we have a ton of opportunity to continue to drive supply chain efficiencies.

First off, this past year, a lot of it has been lapping what occurred in the prior year. But as part of that process -- profits, we've seen the ability to be able to generate even more next year.

So I think the important piece to take away from that, though, is to not necessarily assume that we're going to have 100 basis points of gross margin expansion every quarter throughout the rest of the year, but we're going to continue to see a lot of these supply chain initiatives move forward throughout the year and help mitigate some of the commercial environments.

.

And we'll take our next question from Chris Horvers with JPMorgan. .

I wanted to focus on Pottery Barn a little bit.

How much do you think of the issue is an advertising issue versus a sort of generational issue where baby boomers, where Pottery Barn was the quintessential brand for them and perhaps the millennials is not picking up that? And so is that the idea with the increased advertising and the shift to lower price points? And as a follow-up to that, as you think about PB comps, I know you don't provide by quarter or, excuse me, by brand, but do PB comps recover in the near term, especially considering that tough compare overall? Or is this something that stages over the year and you expect a much bigger back half?.

Thanks, Chris. The research that we did showed us that our brand loyalists love us, and Pottery Barn is top of their list. There isn't a big complaint from them that it's a problem to solve.

It's more the opportunity to reach more new customers and also to force reconsideration of customers who may say, "I know Pottery Barn, but it's not my style." And so it was very good for us to do the work because it became very clear what a powerful brand we have and that what we need to do is to give them more entry points to the brand.

And we talked earlier about the focus on what we are calling the candy, the things that you buy impulsively because you love them. And when brands have those kinds of products, they attract new customers, and often after that life stage is they buy furniture. We didn't see a big change across different age groups.

There's a lot of millennials who love more traditional furniture. We know that the opportunity is often size because as people move to smaller living arrangements and the urbanization happens, the large-scale furniture is difficult.

And we've done small spaces before, but we actually haven't gone small enough, and we haven't altered our value creation, which is really important to us so that, again, we reach those customers who may be moving into their first apartment. And we're seeing that these couple strategies are really working to drive the new customer acquisition.

In terms of advertising, we continue to make the shift from catalog to digital advertising, and we are focused on digital storytelling. We know that one of the key differentiators in our Pottery Barn product is our quality and the way things are made and the importance of toxin-free materials.

We know the customers care about these things, and so we're focusing on our marketing to tell these stories and also to give them more content because we know that decorating is hard, and they've always seen us as the source of inspiration. So you'll see us continue to push on that kind of marketing and to invest more there than we have previously. .

And we'll take our next question from David Magee with SunTrust. .

Just, I guess, a 2-part questions as well.

One, just bigger picture, with the environment being difficult and/or in flux, what do you think it's going to take for sort of the tailwind to improve for your business? And then secondly, more specifically, what is your current furniture delivery times versus your -- what the industry averages right now?.

Sure. Thanks, David. We are seeing the sales react short term to various news events. We saw it during the election. We see it whenever there's anything big in the media. However, we're focused on the longer-term trends versus this daily or weekly choppiness. And comping metrics were solid.

Employment numbers have been improving, and these strong housing fundamentals are supportive of the home improvement industry. And we typically see that customers spend on furnishings after these home improvement projects.

So the customer appears to be getting healthier, and I believe all of these fundamentals are favorable and should support industry growth. And we believe that if we continue to provide differentiated products at a great value and a superior customer service, we'll be able to continue to take share.

Now, in terms of our furniture deliveries, we have a lot of different types of furniture. We have furniture that's in stock, and we can deliver that faster than most. We've done this measurement. We have furniture that's custom, and we are continually working those numbers down.

And our Sutter Street manufacturing in North Carolina allows us to do that because we're running it ourselves, and we are continually making improvements. And we measure every week how much is on time, so there's also the idea of how long it takes but also how do you deliver on your promise.

And this is an area that we're very focused on, and we continue, although we've made improvements, to not be satisfied with where we are and realize that our competitive advantage will continue to be to outperform, particularly in large cheap furniture. .

And we'll take our next question from Peter Benedict with Robert Baird..

And we'll move next to Matt Fassler with Goldman Sachs. .

At the risk of asking a banal question about the first quarter, if we look at the comp -- mix month comp sets in Q4, obviously, Sonoma tends to be more important in Q4. If you just roll that mix forward or rather adjust for the mix in the first quarter, maintaining those trends would probably drive a brand comp of below the low end of your range.

Obviously, you're guiding here at the outset of Q1, 3 or 4 weeks deeper into the quarter than you usually do, so you probably have some pretty good visibility.

So is there implied in here some intrinsic improvement implied in some of the brands outside Sonoma?.

Well, obviously, we don't give by-brand guidance, Matt. But what I would say is, obviously, the low end of the guidance is sort of saying we're going to hold to where the trend was in Q4, and the high end of the guidance assumes improvement.

And so certainly, we believe as we move throughout the year that we're going to have the Pottery Barn brands return to growth, and so that's a factor of it. But there isn't anything else that's sort of a step change across the other bands. .

And we have next, Peter Benedict with Robert W. Baird. .

Recognize you prefer to get both here. Just how are you thinking about the trade-off between margin stability and expansion with market share? I mean, is -- it -- obviously, you guys have -- are guiding to stable margins, but the growth isn't too big on the top line, so just curious at what point.

You've got a lot of savings coming in supply chain, the decision points to kind of reinvest more in that to drive market share. Just curious how you're thinking about that from a big-picture perspective. .

Thanks, Peter. We're obviously focused on both top line performance and earnings growth, and so certainly, long term could we have op margin expansion? Potentially.

But to your point, what we think is the most important thing to do is to drive the top line growth, and so we're reinvesting a lot of those savings right back into it with digital advertising investments this year. We also have the annualization of our Southeast DC, which is very competitive from an advantage perspective.

And so that is definitely what we're focused on. You could be penny wise and pound foolish and take all the savings and be a hero for a day and have op margin expansion, but that's not going to drive you in the long term. So yes, at the high end of our op margin guidance, we're flat to last year.

We have slight deleverage, but we think with our investments offset by our supply chain efficiencies, that's the right spot to date. .

And we'll take our next question from Michael Lasser with UBS. .

It's on the portfolio of brands. Historically, you've used M&A as a strategy to buy small brands and grow them organically over time.

A, are you comfortable with your portfolio of brands are right now? And B, are you looking at M&A as a strategy along those lines? Or would you consider to use that as a tool in a different way?.

We're always looking at M&A. I mean, we're always looking at ideas and saying what's the right choice for the company. If we think there's a good opportunity to pursue, we will. So it's not a matter of having an opinion right now as to whether we're doing M&A or not. It's a matter of what the opportunity is.

We've obviously done a very good job of growing our own brands internally, and we've had incredible success now with Rejuvenation that we think can grow to be a very large brand for us. So as you can imagine, there's lots of opportunities that come our way, and we evaluate all of them. And if it's a good idea, we'll do it. .

And next, we have Greg Melich with Evercore ISI. .

Actually, I want to do one question on margins with a follow-up.

If you look at the supply chain savings now, are we back to a point where the decline in the shipping costs actually mean we're covering the costs to the end consumer? In other words, are we still losing money trying to deliver stuff to people? Or you've at least gotten the cost to a point that now it's a full baked and it's covered?.

Yes -- no, we're not losing money delivering to people at this point. .

Great. And then the follow-up and maybe moving to SG&A a little bit. You talked a little bit about marketing and advertising and where it goes and how the shift is continuing from, I guess, catalog to more digital.

Could you help us understand where that shows up in the P&L and by the segments, like where we should be thinking about the bulk of the advertising budget going now at this point?.

I mean, what are you saying -- geography on the P&L, it's still within the advertising line within SG&A.

Is that what you're asking?.

Right.

But like, if you think about it between the e-commerce business and the retail business, how do you guys think about it?.

Let's let John -- John's here.

John, do you want to answer that question for us?.

Yes, absolutely. I mean, the marketing environment is competitive. It always has been. And we're fortunate enough to have a heritage of being a direct response retailer where at home, the discipline is really associated with making balanced trade-offs between high RI driving conversion programs and strategic brand building top-of-funnel investments.

I mean, great news for us is that while the medium may have changed over time, from yesterday's discussion about being catalog so I can page productivity to today's digitally oriented discussions about emerging social channels, video, syndicating our content. We love this stuff. .

We have a passion for driving marketing effectiveness, and we have a customer analytics team, a customer experience team, customer insights team.

They all partner and assess that marketing mix on a multi-touch attribution model, it's really based on identifying opportunities to go broader and deeper where appropriate and also to make appropriate trade-outs. So we're part of great companies like Google to assess our Brand Arc and develop the strategies to really expand that brand awareness.

So this is part of our DNA. We've developed this through decades, and it's not the kind of thing that comes naturally to the pure players and startups. So understanding how to do this in a long-term sustainable profitable way, for us is the key advantage. .

And our customer acquisition costs, are they higher or lower than they were, say, a couple of years ago, as you do the transition?.

Our customer acquisition costs are up, and we're finding great opportunities in the context of digital marketing. This is one where we're really driving a large percentage of our new customers. So we're excited about that. .

And we'll take our next question from Dan Binder with Jefferies. .

I was just wondering if you could talk a little bit about the comp store sales at West Elm. They've seen some deceleration although still healthy.

I was curious, is that a function of just tough comparisons, a slowdown in the industry? Or is it product-driven? And how are the oldest stores comping versus the newer stores?.

Sure. It's Laura. We're really pleased with the growth in West Elm. Growth in Q4 was almost 11%. Full year was over 18%. And as I said, including revenue from our franchise partners, the brands now reached a $1 billion threshold. And the good news is that when we measure the brand awareness, it's really low.

So that tells us there's a lot more room for growth. And the new stores have been successful. We have a lot of growth plans in place for the brand, including hospitality and workspace, and you're going to see those growth opportunities become even more meaningful next year as well as relentless focus on our store business and our direct channel. .

And West Elm in the fourth quarter, like the other brands, was also impacted by the retail environment, specifically in the first month of the quarter, like everybody spoke to. So you saw that impacts probably more of the comp business than the non-comp. So that's why there's a delta between the non-comp and the comp.

The non-comp from the newer stores are doing phenomenally well. I wouldn't read anything into that. .

Okay. And then just on store remodels, it sounds like you're pretty pleased with them.

Anything holding you back from accelerating it?.

We're just -- we continue to read them. We don't want to get ahead of ourselves. We've always had a really high hurdle rate for profitability in our real estate, and there's a lot changing there now. So you do a couple, you do some more, you make sure it works in multiple markets.

And we have some great landlord partnerships going on and long-term relationships that are going to help us continue to evolve our stores but also not get ourselves in a situation where our retail profitability declines because of the investments. .

Next, we have Brian Nagel with Oppenheimer. .

I want to touch on -- Julie, you talked about, in your prepared comments, the e-commerce investments here in 2017.

So the question I have is, as we look at these investments that we made this year, are they more, I guess, transformative or more maintenance? I mean, going out, and I know you haven't given guidance really beyond 2017, but is there a point at which the investments, and particularly that which pertains to online, begins to tail off?.

Yes, there's several different things that we're investing in. We do think it's a transformative year with the amount of -- it is our prioritization for the year is to invest in e-commerce and digital leadership. That's why it was the first thing that I mentioned from an investment perspective.

We're looking at everything to give the customer experience the best thing possible, so whether it's the next-generation product page, whether it's 3D product visualization, whether it's more investment in mobile, whether it's better on-site search experience.

We're also looking at buy online, pick up in the store, which has seen it in the Williams-Sonoma brand. It's across the gamut of all the things that we are investing in, and we do think this is incredibly important. Obviously, we have 52% -- we're different than other retailers.

We're already at the 52% hurdle rate from e-commerce perspective, but we do think the growth is going to continue to grow there. And so it's important with our level of profitability at, what, this past was 23.7%, the more we grow that channel, the better returns we get. And so it's going to be a very strong focus for us. .

Then just regarding -- looking out beyond '17, I mean, it sounds -- again, it sounds like there's some significant investments you're making here in '17.

But as you look out beyond that, should we expect ongoing online investments?.

Yes, absolutely. .

Our next question is from Simeon Gutman with Morgan Stanley. .

I want to ask -- it's a follow-up somewhat to Matt's question earlier, maybe asked a little differently. So in the fourth quarter, the comparable brand comps are strong, and then the guidance for next year is modest growth. So I wanted to get a sense -- the biggest changes you mentioned, I don't know if it's environment.

You mentioned some changes at Pottery Barn. I'm wondering -- we have a couple of data points we saw, we -- not that the customer deposits are a perfect gauge, but they look flattish year-over-year at least coming into this quarter.

Can you also tie into that answer any timing on the digital customer acquisition? I would assume that, that should respond rather quickly but curious on the timing.

And just what gives you confidence in the forecast for next year on top line?.

Well, there's a lot of questions in there, but I can tackle it.

I think the first and foremost thing you have to realize is that we're giving guidance today, and we're coming out of Q4 where, quite honestly, we had a negative 1, right? And we still see softness across the Pottery Barn brands, and the environment is a little bit choppy, the current retail environment.

With that said, as you move throughout the year, we have absolutely factored in the Pottery Barn brands returning to growth. We've also factored in the fact that all of our growth initiatives under the covers are still growing double digits.

So whether it's West Elm, whether it is our newer businesses, whether it's the global company-owned businesses, all of that is going to continue. And so I think when you look at those growth initiatives, combined with the fact that Pottery Barn returning to growth, that is what gives us the confidence in our top line guidance.

I think you need to remember that if you look back in time with the Pottery Barn brands, from the time we've owned them, they have only been negative one other time, was during the recessionary period, '08 and '09; the first time they've been negative. And if you look back the last, I don't know, 6 years or so, they had an average 6 comp.

So it's a matter of when they turn around, but they will. And so that, plus these other growth initiatives, gives us confidence in our guidance. .

I think also, you asked the question about customer acquisition, and we're happy to report that we saw a very solid growth in GDC new to corp [ph] customers in Q4, with our investment in digital marketing paying off. And this is, I think, what you're referring to in terms of a nice positive as we go into the new year. .

And just to clarify something, I don't want to put words in your mouth, but did you say -- you said growth initiatives and you said double digits and you mentioned West Elm. I don't know if you meant growth initiatives within West Elm or the West Elm comp should get back to double digits for the full year for next year. .

Well, revenue growth, they grew 10.8% in Q4. So they're still double digit. And on the year, they're still double digit. So I'd still count them as double digit. .

And that is all the time we have for questions today. I'd like to turn the conference back over to Laura for any additional or closing remarks. .

Well, thank you all for joining us. We appreciate your support, and we look forward to talking to you next time. .

Once again, that does conclude today's presentation. We thank you for your participation, and you may now disconnect..